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In our Investment Outlook 2019, we identified three themes for the new year: 1) interest rate normalization, 2) regional economic divergence, and 3) new geopolitical regimes.

Below, we put these themes in the context of recent market developments, placing a special emphasis on the “new geopolitical regime.”

Gérald MoserMulti-Asset Strategist

Interest rate normalization made headlines in December, as financial markets moved to price in a higher risk of a recession. This led the market to go as far as pricing in rate cuts by the US Federal Reserve (Fed) in 2019. While we have changed our forecast for the timing of the two hikes we expect later in the year, we believe that the Fed will continue to normalize interest rates. The first few days of the year suggest that markets are slowly moving back to a more optimistic growth view. In light of weaker manufacturing activity, our Investment Committee has shifted to a neutral tactical view on broad commodities, with a preference for oil only. We still see a long-term opportunity for commodities to do relatively well over the year.

Divergences in EM equities

As for our second theme, some of the divergences in developed markets (DM) are reversing, while divergences in emerging markets (EM) could persist. This is reflected in performance, with Brazilian equities significantly outperforming markets in Turkey and South Africa last year. We are negative on South African equities and, in fact, now expect the entire Eastern Europe, Middle East & Africa region to underperform the broad EM equity index. Yet, we would expect divergences in DM to diminish somewhat in 2019. US leading indicators are starting to provide evidence of this, declining from very high levels and starting to close the gap with Japanese and Eurozone indicators.

Geopolitical events still impacting markets

Most of the geopolitical drivers from last year continue to make headlines at the start of 2019, and are impacting market sentiment. First and foremost, trade tensions between the USA and China continue to simmer. The latest developments would suggest that, as we expected, an agreement is likely to be found before the end of March, meaning that no additional tariffs are likely to be levied on Chinese exports to the USA. Yet, other political issues such as Brexit or the confrontation between a Democrat-controlled House of Representatives and President Trump, currently resulting in a protracted government shutdown, are likely to continue to keep geopolitiAAUC in the spotlight.

Important Information:

This part of the material: (i) aims to provide macro-market commentary; (ii) does not contain any statements or advice in relation to any specific marketable security or financial product; and (iii) does not take into account your personal circumstances and should not be treated as any form of regulated financial advice, legal, tax or other regulated service.